Is alimony taxable? Understanding tax rules on lump sum and monthly maintenance payments after divorce

On the other hand, a one-time lump sum alimony is generally treated as a capital receipt and therefore not taxable in the recipient’s hands.

When a divorce involves both a one-time settlement and monthly maintenance, the tax treatment differs for each. Today's ask Wallet Wise query decodes how periodic payments are taxable in the recipient’s hands vis a vis  a lump sum settlement. 

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My wife and I are going for a mutual divorce. This will involve a one-time, full and final settlement, in addition to monthly maintenance payments. Will these payments be taxable in her hands? Will I be eligible for any tax benefit on the alimony paid to her?

Expert’s view: The Income Tax Act does not contain specific provisions dealing with the taxation of alimony received. Broadly, alimony can be of two types: one-time lump sum payment and recurring (periodic) payments. The court may award either or both while granting a divorce decree.

In the case of recurring alimony payments, no specific exemption is available under the Income Tax Act. Therefore, such periodic payments are treated as revenue receipts and may be taxable in the hands of the recipient under Section 56 as “Income from Other Sources.” These are viewed as periodical monetary returns arising from a definite source -the divorce decree -and hence, akin to income. However, maintenance received for children is not taxable, even if it is paid periodically.

In CIT v. Shanti Meattle (Allahabad High Court), the court held that recurring maintenance payments are taxable as income in the hands of the wife, while excluding any child-specific amounts from taxation.

On the other hand, a one-time lump sum alimony is generally treated as a capital receipt and therefore not taxable in the recipient’s hands. This position is supported by the Bombay High Court ruling in Princess Maheshwari Devi of Pratapgarh v. CIT (147 ITR 258), where the court held that a lump sum alimony extinguishes the wife’s right to claim future maintenance from her ex-husband. Accordingly, the lump sum received constitutes a capital receipt and is not chargeable to tax. Even if not regarded as a capital receipt, such a payment would still be covered under an agreement to live apart and hence, not taxable.

Once the divorce decree is passed, the relationship of husband and wife ceases to exist, and therefore, clubbing provisions (which apply to transfers between spouses) will not apply to assets transferred pursuant to the divorce decree.

Please note that although the periodic alimony payments may be taxable in your wife’s hands, you will not be entitled to any deduction for such payments while computing your taxable income.

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.

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